June 23 - 29, 2008

In Pakistan Islamic banking has attained significant market share over a very brief period. The story started with the central bank deciding to allow Islamic banking to run in parallel with the conventional banking. Sponsors of the banks, clients, Shariah scholars and the central bank itself have been playing key role in developing Shariah compliant products but above all the regulatory regime has contributed the most towards this significant development. Pakistan has achieved this size in a very brief period, whereas other countries took decades to achieve the comparable size.

The market share of Islamic banking assets in the overall banking system rose to 4.3% as of December 31, 2007 compared with 3% in preceding year. Islamic banking deposits, financing and investment stood at 4.1%, 4.3% and 2.6% respectively as compared to 2.79%, 2.88% & 0.94% a year earlier. YoY growth for total assets, deposits, financing and investment was 75%, 78%, 91% respectively. Branch network during the same period reached 289 from 150 branches, showing 93% increase in year 2007.

It is expected that by the end of year 2008 the share of assets of Islamic banking to overall industry will exceed 5%. It may be said with confidence that Islamic banking industry is growing with healthy signs of financial inclusion. The analysis of different components of consolidated balance sheet shows that the size of balance sheet of all Islamic banking institution (IBIs) is increasing at a substantial rate.


The increasing trend in deposits over the years has remained intact. Overall deposits of IBIs as on December 31, 2007 stood at Rs 147,361 million reflecting YoY increase of 76%. Both Islamic banks (IBs) and Islamic banking divisions (IBDs) contributed towards overall increase. However, IBs deposit growth was much higher than IBDs of conventional banks. Specifically, IBs' deposit grew at 93% compared to a growth of 44% in deposits of IBDs. The share of Saving, Fixed and Current Accounts of customers' deposits were 32%, 36% and 20% respectively of overall deposits, whereas deposits of customers and of financial institutions represent 90% and 10% respectively.


Islamic banking Industry in Pakistan depicts financing (net of provisions) of Rs 106,848 million at end December 2007, which is 62.85% higher than the previous year. IBDs were equally active in financing activity during the year. IBs and IBDs share to the overall net financing by 64 % and 36 % respectively. Around 80% share in financing represented the three modes of financing i.e. Murabaha (39%), Ijarah (24%) and Diminishing Musharaka (18%) respectively. This shows the reluctance of banks to opt for other modes of financing either due to conservative mindset or lack of products innovation.


Investment position of IBIs as on December 31, 2007 was Rs 30,961 million which showed an increase of 322.52% over the previous year. The increase in investments reflected new investment in Sukuk.

The increasing phenomena related to both IBs and IBDs with their respective share of 71% & 29% respectively.


Total assets of IBIs as on December 31, 2007 were Rs 205,946 million and show an increase of 73% over the previous year. Though, IBs have major share of 68% as compare to IBDs' share of 32 % of total assets. Yet, in absolute terms the increase of Rs 23.6 billion in IBDs assets, depicted the increasing interest of conventional banks in the Islamic banking. The variance of increase in total assets of IBs is high as compared to IBDs.


The State Bank of Pakistan has formulated Risk Management (RM) Guidelines for the IBIs with a view to further strengthening the regulatory framework in the area of risk management. These guidelines are based on a "Guiding Principles of Risk Management for Institutions offering Islamic Financial Services" issued by Islamic Financial Services Board (IFSB), which is an international-standard setting body of regulatory and supervisory agencies and the same have been tailored keeping in view the regulatory regime of State Bank of Pakistan. However, these guidelines will be in addition to the various guidelines issued by SBP from time to time and IBIs will be required to comply with both set of guidelines. These guidelines provide a set of principles of best practice for establishing and implementing effective risk management in IBIs.

These guidelines set out fifteen principles of risk management and provide guidance for each category of risk, drawn from discussion on Islamic Financial Industry practices. Further, these set of principles are applicable to the six categories of risks: Credit risk, Market risk, Liquidity risk, Operational risk, Equity investment risk and Rate of return risk. For each type of risk, risk management practices have been discussed giving examples of specific Islamic banking modes of financing and according to various roles that an IBI may perform. These guidelines will further complement and enhance the current risk Management regime of SBP by identifying and suggesting technique to manage various types of risks unique to Islamic Banking Institutions.

Since most of the IBIs in Pakistan are new entrants in the market, they are encouraged to put in place an effective risk management strategy right from the start based on the said guidelines as well as other guidelines issued by SBP. These guidelines are flexible in the sense that IBIs can adapt them in line with the size and complexity of their business.

The State Bank of Pakistan has asked the Islamic banks to increase their presence in rural areas and diversify their network for the benefit of the under-served. The Islamic banks needed to focus on enhancing farm and non-farm lending by opening up branches in rural areas.

There is also a unique opportunity for Islamic banks to do infrastructure financing and long-term lending by playing a pivotal role in the development of rural areas. Rural prosperity has increased over the years and capacity to buy and saving is higher in rural areas.